INTEGRATING SPORTS INTO ECONOMICS TEACHING1
Transcript of INTEGRATING SPORTS INTO ECONOMICS TEACHING1
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INTEGRATING SPORTS INTO ECONOMICS TEACHING1
John J. Siegfried
Allen R. Sanderson
The measurable impact of spectator sports on gross domestic product (GDP) is trivial.
The gross revenues of a Major League Baseball (MLB) team in 1992, for example, the last year
for which we could find these data, were similar to those of a single large US supermarket. 2 In
2018 the average gross revenues of a Major League Baseball team were $330 million, just about
the same as the Dippin Dots company, which makes colorful small pelletized ice cream dots sold
primarily at theme parks and seashore kiosks.3 The revenues of spectator sports as a whole
constitute only a trivial 0.14 percent of GDP (Szymanski 2003). Such comparisons, however, fail
to capture the important role of sports in American society.
A typical half-hour local evening television newscast contains about three or four minutes
of sports news, roughly 20 percent of the substantive broadcast. The usual daily newspaper
devotes one of only three or four sections exclusively to sports. Many more people discuss the
challenges facing the local college football team with friends and family than ponder the fortunes
of the neighborhood grocery store or pelletized ice cream dots. There is undoubtedly a lot of
interest in sports by Americans in general, and by students in particular. In our opinion, students
are more likely to engage in the deeper thinking that leads to retention if they are interested in the
subject being discussed.
The advantages to using sports examples to teach college economics go beyond simply
attracting students' interest. Economics is often taught by analogy (McCloskey 1990). Students
are more likely to gain an understanding of a point if they can connect personal experience to the
analogy, and a lot of young Americans have had substantial experience either playing and/or
watching sporting events. Thus, students are more likely to grasp a lesson on marginal vs.
average revenues or costs from an analogy to how the scoring average of a high school
basketball player changes after a terrific game than from a rendition of the effect of an additional
passenger on an airline's marginal and average cost per passenger mile.
1 This chapter is an updated and revised version of Chapter 8, “Using Sports to Teach
Economics,” in William E. Becker and Michael Watts, eds., Teaching Economics to
Undergraduates: Alternatives to Chalk and Talk, Edward Elgar, 1999. Used with permission of
the publisher.
2 A comparison based on the 1992 Census of Manufactures showed that the average revenues of
a Major League Baseball team were approximately 95 percent of the average revenues of one of
the 700 largest supermarkets in the United States. 3 https://entrepreneurshandbook.co/how-dippin-dots-went-from-bankruptcy-to-330m-in-annual-
revenue-in-6-years-ae65a18bd59d.
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Periodic changes in sports leagues' rules, like the shift in property rights over the future
services of players from team owners to the players themselves when free-agency was
introduced in the latter decades of the twentieth century, or the use of a designated hitter or an
additional referee, produce natural experiments that illustrate economics in action. The frequent
occasions for decisions by owners, managers, and players offer a virtual experimental laboratory
for analysis (and, some might say, even complete with rats).
The plethora of data available about the individual inputs and outputs of sporting teams
(as well as the interest of professional economists in sports) has produced a substantial empirical
literature that compares actual behavior to that predicted from economic models. Furthermore,
many contemporary examples and data are easily accessible for classroom use because of the
intense coverage of the "business of sports" by newspapers and magazines.
Both of us have taught principles of economics and a specialized undergraduate course
on the economics of sports regularly. In this chapter we relate some of the examples from sports
that we use to illustrate important economics principles and some of the lessons we have learned
from these experiences. We are certainly not the first to think of using sports as a vehicle to teach
economics (Bruggink 1993; Merz 1996); there are now scores of specialized courses on the
economics of sports being taught in America's colleges and universities, and almost all
introductory economics textbooks use sports to illustrate some basic principles. The examples
that follow vary in applicability and level of analysis from the introductory course to
intermediate theory and applied field courses, but all should be within the grasp of motivated
undergraduate students.
I. PRINCIPLES OF ECONOMICS IN SPORTS
Relative Prices
Press reports regularly claim that baseball ticket prices have soared beyond the reach of
average fans, suggesting that it now costs a family of four well over $200 to attend a typical
MLB game.4 Whether something is considered dear or inexpensive depends on several factors:
(1) the rate of its price increase over some time period compared to a yardstick such as the
Consumer Price Index (CPI), (2) its price relative to the price of available substitutes, and (3) its
price relative to a measure of ability to pay, such as the wage rate or income. On each of these
criteria, average baseball ticket prices, for example, are cheap and getting cheaper. An example
4 A 2019 study by Team Marketing Report in Chicago found that it costs a family of four an
average of $234 to attend an MLB game. The usual tally of a family's outlay for a game includes
tickets, soft drinks and beer, hot dogs and desserts, parking, and souvenirs. Although a family
may indeed purchase all of these items on a given evening, (a) they are not required to buy
anything beyond the admission tickets, (b) the food substitutes for the cost of what would have
been eaten at a restaurant or prepared at home, and (c) the souvenirs are not likely to be
purchased on repeat trips to the ballpark. Similar 2019 costs for the NHL, NBA, and NFL were
$424, $430, and $540, respectively.
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like this is an excellent way to introduce students to relative prices, changes in the price level,
and changes in purchasing power. Ask them what would be the role of a price system if each
individual price in the economy tracked the CPI perfectly.
Measured against inflation, the average admission price to a Major League Baseball
game fell or remained constant for most years from 1950 to the early 1990s. Ticket prices have
risen relative to the CPI in the last few years, but the inflation-adjusted price has only doubled
over the last 70 years. In 2019, the average ticket price to a Major League Baseball game was
still just $33. In 1950 the average ticket price was 0.047 of average annual income; by 2019 it
had risen to 0.052 of average annual income, virtually no change.
Relative to the prices of many other forms of entertainment (i.e., substitutes), baseball
ticket prices are lower and have risen less rapidly over time. Professional basketball, football,
and ice hockey tickets are each at least three times more expensive5 (but each of those sports
either play many fewer games or play in indoor arenas that seat many fewer fans than baseball).
Amusement parks, rock concerts, and theater tickets also cost considerably more than a baseball
ticket. Museums, movies, and a walk in the park are exceptions (and a good topic for discussion).
Marginal Analysis
One of the core concepts in economics is decision making at the margin, and the
distinction between marginal, average, and total values. Examples from the world of sports can
help students understand and appreciate this concept. For example, Los Angeles Angels’ slugger
Mike Trout had been in Major League Baseball for ten years when he entered the 2021 season
with a .304 lifetime batting average. If he hits .347 in 2021 with the same number of at-bats as he
averaged over the previous ten years, how does this (marginal) year change his lifetime batting
average?6
Many athletic contests are decided “at the margin." Just one missed tackle in the National
Football League (NFL) or one missed free throw in a Women's National Basketball Association
(WNBA) game can cost a team a win. A second baseman signaling to the shortstop whether the
next pitch is a fastball seldom makes a difference, but the one time it does during a season can
put a team into the playoffs. For example, in 2018 the Houston Astros successfully stole
5 2019 average ticket prices were $33 for MLB, $89 for the NBA, $102 for the NFL, and $135
for the NHL.
6 In historian Doris Kearns Goodwin’s book, Wait Till Next Year, her memoir of a young girl
growing up in Brooklyn in the 1950s, she often listened to Dodgers games during the day and
then retold the story of the game to her father in the evening. According to Goodwin, “When I
had finished describing the game, it was time to go to bed, unless I could convince my father to
tally each player’s batting average, reconfiguring his statistics to reflect the developments of that
day’s game. If Reese went 3 for 5 and had started the day at .303, my father showed me, by
adding and multiplying all the numbers in his head, that his average would rise to .305. If Snider
went 0 for 4 and had started the day at .301, then his average would dip four points below the
.300 mark.” (Goodwin 1997, 17)
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opponents’ catchers’ signs to the pitcher and occasionally transmitted the information to their
teammate in the batter’s box by banging on the lid of a garbage can a certain number of times.
That helped the batter anticipate the kind of pitch to expect. It apparently worked enough to give
the Astros a significant advantage, for which they were eventually penalized heavily by the
Commissioner of MLB. Swimmers, skiers and runners try to save precious seconds by the
aerodynamic design of their clothing or equipment because the difference between winning a
race and finishing second is often measured in hundredths of seconds, as Lindsay Vonn
illustrated when losing the gold medal in the 2018 women’s Olympic downhill skiing race in
South Korea by 0.47 of a second.7 In a recent year someone calculated that if professional golfer
Sergio Garcia had made just one more putt in each tournament (not one putt in each round, but
one putt in the entire tournament) in which he played, his earnings that year would have
increased by $2.5 million.
The public often questions values in a culture that rewards young athletes with multi-
million dollar contracts yet balks at paying elementary and secondary school teachers, to whom
we entrust society's best hope for the future, a relative pittance. This issue is perfect for the
transition from the traditional water -diamond paradox, which most students grasp and
appreciate, to a contemporary sports illustration. It is relative scarcity at the margin, not total
value that determines price. It is simply easier -and less expensive -to find one more person who
can teach fourth grade or high school history well than it is to find someone who consistently can
hit .300 (or snowboard like Shawn White). The fact that we spend about $60 billion a year on
sporting events but $700 billion annually (in 2017) on public elementary and secondary
education suggests that our values are reasonably respectable.
Fans and commentators often criticize athletes who exhibit antisocial, and/or even illegal
behavior on or off the court or field of play. Dennis Rodman’s eccentric behavior in the National
Basketball Association (NBA) in the 1990s, quarterback Michael Vick’s staging of illegal dog
fights while playing in the NFL, Pete Rose’s gambling while he was a manager in baseball (that
led to a lifetime ban from participating in MLB in any way and has kept him out of the Baseball
Hall of Fame), and Tonya Harding’s role in orchestrating an attempt to knee-cap her figure
skating rival Nancy Kerrigan in 1994 that eventual led to Harding being banned from figure
skating for life are but a few examples. Employers would fire most of us for similar stunts. Apart
from the fact that some of this behavior may increase the demand for tickets (there is evidence,
for example, that fighting in the National Hockey League (NHL) attracts fans (Jones et al. 1993;
Rockerbie and Easton 2019)), the point to emphasize is that these individuals receive large
economic rents in spite of their anti-social behavior because there are few perceived substitutes
for them. In contrast, because there are close substitutes for the typical worker (including school
teachers), he or she earns little economic rent. Thus behavior that the boss perceives as
inappropriate can be met with immediate dismissal in schools or universities. In sports, however,
termination likely means the destruction of considerable economic rent that is accruing to the
7 Fans and commentators frequently complain that a particular baseball player "can't
hit," when in fact the difference between an average hitter -someone with a .260 average - and a
player on the verge of stardom and a multimillion dollar contract -someone who can hit .300 -is
only one hit a week.
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franchise owner, which is one reason why the unexpected dismissal of Latrell Sprewell by the
Golden State Warriors for choking his coach in November 1997 was so surprising and attracted
so much attention.
Demand
Basic microeconomic models posit that the quantity demanded of a particular good or
service is inversely related to its price, ceteris paribus. Factors held constant include the price
and availability of substitute and complementary goods, income, tastes, expectations, and
population. Sports offer a convenient way to get students to think about ceteris paribus issues.
For example, the quantity demanded for baseball is a function of the admission price. Other
considerations that must be held constant to properly estimate the effect of price on attendance
include: the quality of the home team and opponent; how closely the teams are matched; the time
the game is played; weather conditions; promotions (such as pre-game souvenirs or post-game
fireworks); the location; convenience of travel to and quality of the venue; competing events or
entertainment alternatives; whether the game is televised; per capita income and the local
unemployment rate; and the population within driving distance of the game.
In addition to the concept of holding other things constant, an instructor can also explore
elasticities: How sensitive are fans to ticket prices; does this sensitivity vary with the price level;
how income elastic is the demand for baseball, bowling, tennis or cricket? A related demand
concept that we find more difficult for students to grasp is the derived demand for a factor of
production. Players' salaries are determined by demand derived from the demand to watch
particular sports and by the employment alternatives available to players. The profit maximizing
price is what the market will bear, based on the anticipated demand for the sport. Players' salaries
do not determine ticket prices, no matter how often owners allude to their rising payrolls to
justify ticket price hikes. The demand for players, and the level of their salaries, is derived from
the overall demand to watch the sport in person or on television and to purchase logo
merchandise.8
Efficiency
Many resource allocation decisions in sports affect efficiency. We focus on just one of
them, the allocation of playing talent across teams, in order to illustrate the importance of
matching the quantity supplied to the quantity demanded for maximizing social welfare.
8 In 2019 each NFL team received $255 million annually from the league's television contracts,
up 150 percent from $100 million in 2010. Under the 2020 television contracts, which began
during the 2014 season, regular season games are broadcast on five networks: CBS, Fox, NBC,
ESPN, and the NFL Network. The 150 percent increase in television revenues obtained by the
NFL from 2010 to 2019 did not lower ticket prices just because owners and leagues now had
more money from non-ticket sources. Ticket prices remained high as a reflection of strong
demand to watch live football. NFL player salaries increased, both because of revenue-sharing
arrangements and because salaries are derived from the overall demand for football viewing.
This is an excellent example of the order of causality.
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Professional team sports leagues take steps allegedly designed to balance the level of
playing skills among competitors. They allocate players new to the league on the basis of a
"reverse-order draft" that awards the most promising players to those teams that have recently
enjoyed the least success on the playing field.9 Currently the National Football League, the
National Hockey League and the National Basketball Association limit the total player payroll of
teams in an effort ostensibly to prevent "wealthy" teams (those located in more densely
populated areas or in areas with more avid fans) from securing a disproportionate share of the
most talented free agent players. Major League Baseball sets a payroll threshold. If a team
exceeds the threshold it must pay a “luxury tax” to the league, apparently for the luxury of
spending excessive (of the threshold) money on payroll, and reducing the incentive for teams
playing in large markets from accumulating so many talented players as to injure reasonable
competitive balance.
Economists have long recognized (Rottenberg 1956) the futility of efforts to balance team
playing talent when the teams play in different localities that vary in population and in front of
fans that vary in their willingness to pay for a winning local team and contracts of players can be
transferred among teams. As the Coase theorem reminds us, in the absence of significant
transaction costs, resources move to their most valuable use regardless of initial ownership. If a
talented baseball player is valued more highly in New York than in Kansas City because there
are more New Yorkers willing to pay to see the Yankees win than there are Kansas City
residents willing to pay to see the Royals win (or, even with similar populations, if New York
residents value winning more than do residents of Kansas City) the player's contract will be
transferred from Kansas City to New York for a price between his value at the two locales.
Transfers like this would occur regardless of whether the property rights over the player's
services reside with his original team (as in the days when a "reserve clause" granted perpetual
ownership rights to the team that first signed a player unless it transferred those rights to another
9 The reverse-order draft provides an opportunity to discuss the frequent conflict between strong
incentives, arguably one of the most important ideas is all of economics, and equality of either
opportunities or outcomes. For example, why reward a team that performs badly with the best
player in the subsequent draft? Why not make it draft last, or demote it to minor league status
and replace it with the best minor league team for the next season, as is done in European
professional soccer? What are the pros and cons of such a promotion and relegation approach
that rewards success and punishes failure (vis-à-vis a reverse-order-draft that rewards failure and
punishes success) and why might different leagues in different circumstances choose different
incentives? The reverse-order draft also offers an opportunity to discuss unintended
consequences. When some teams realized they were out of contention for the annual
championship, they would sit star players under contract to reduce the risk of injury to them and
also to increase their chances of losing (called “tanking”) and thereby increase the probability of
drafting one of the most talented among the new young players entering the league. Once fans
realized some teams were tanking, attendance waned. To combat this unintended consequence
the leagues put a group of teams with the worst records together into a group and choose the
order of drafting by lottery among them. Thus finishing last rather than fourth to last in the
league standings no longer was valued as highly.
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team) or with the player himself, as is the case for those veteran players who qualify for "free
agency" today.10
Because of player trades and sales, player drafts do not tend to promote a balance of
playing skills among teams. Player drafts may subsidize weak teams by granting them initial
property rights over players whom they can subsequently sell to other teams. The extent of the
subsidy depends on the elapsed time before a player can become a free agent. Free agency for
players does not promote a balance of playing skills among teams either. Wealth-maximizing
players will sell their services personally to the team willing and able to pay the most for those
services, a demand derived from the players' expected contribution to the team's performance
and the willingness and ability of local residents to pay for better performance. Occasionally a
good veteran player will accept a contract below his estimated market value in order to play on a
talented team with a chance to win the league championship or because he and/or his partner
prefer its location (e.g. Wayne Gretsky moving from the Edmonton Oilers to the Los Angeles
Kings because his wife was an actress), further exacerbating competitive imbalance.
For the sake of economic efficiency, this failure to balance competition may be fortunate.
The argument that balanced competition is desirable rests on the false belief that fans value only
one characteristic of games, namely uncertainty of outcome. Fans are clearly not indifferent to
the level of uncertainty of outcome (Knowles, Sherony, and Haupert 1992), but they also value
winning, and the response varies by geographic area (Porter 1992). Although a large imbalance
in team playing-skills reduces the uncertainty of games and thereby the demand for those games,
the greater willingness to pay for winning by fans of certain teams than by fans of other teams
can mean that the efficient level of competitive balance is far from perfectly even (Fort, 2011,
Chapter 6). Imbalance leads to more winning by teams situated where people get more
satisfaction from winning, and less winning by teams whose fans in the aggregate care less about
it. Whenever the difference in the value of winning to the fans in two locations exceeds the loss
in value associated with less evenly matched games, efficiency is promoted by moving playing
skill from the team located where winning is valued less to the team located where winning is
valued more.11 It is also unlikely that severe imbalance of playing talent would be efficient. As
playing-skills become more unequally distributed the uncertainty of games diminishes, the
marginal utility of winning more games to the fans of the more successful teams diminishes, and
10 In the 1960s The Kansas City Athletics (now the Oakland Athletics) sold so many good players
(including the home run king Roger Maris) to the New York Yankees that commentators
sometimes referred to the Athletics as a “Yankees’ farm team.” But the receipts received by the
Athletics for the players kept the team out of financial trouble.
11 A slightly different competitive balance issue concerns not whether a team from a home
territory that values winning highly wins a larger proportion of its games, but rather whether it
tends to win relatively more games played in front of its home crowd. In the NBA, for example,
where the home team retains virtually all of the gate receipts, scheduling (e.g., arduous road
trips) appears to give more of an edge to home teams. It is not surprising, then, that the NBA has
the highest home court winning advantage among the four major professional sports in North
America.
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the marginal utility of winning more games to the fans of the less successful teams grows, both
acting to slow the payoff from further unequal allocations of playing skill. Another disadvantage
of equally balanced competition is the increased likelihood that the outcome of a contest will be
determined by chance -an unusual bounce of a ball or an official's error.
Surplus
Efficiency is achieved when economic resources are devoted to those activities that create
the greatest value for consumers. This basic economic concept is often difficult for students to
comprehend. Getting the allocation right is relatively more important if the value of resources
when they are devoted to their best use substantially exceeds the value that could be created if
they were allocated to their second best use. This difference is surplus.12 It is large when the
demand for the output is high and the opportunity cost of the resources (their value in their next
best use) is low, as is common in sports. Although there are a few, the number of potential
actors, surgeons, lawyers, and Wall Street bankers among professional athletes is limited. The
essence of resource allocation is maximizing consumers' plus producers' surplus.
Many people confuse aggregate revenues with surplus, the net value created by getting
the allocation decision correct. The 1994-95 Major League Baseball players' strike provides an
opportunity to illustrate this difference. Some television news programs reported the "economic
loss" from the strike as the amount of ticket and television revenue that would have been
received by teams if the cancelled games had been played, plus an estimate of how much fans
would have spent on hotels, restaurants, parking, etc. while attending games. Ask students if this
is a good estimate of the social welfare loss of the strike.
There are at least two (potentially offsetting) errors in using forgone revenues as a
measure of social welfare. Each emphasizes an important economic concept. First, revenues fail
to include the consumers' surplus lost to the strike. Thus the "economic loss" due to the strike
may exceed forgone revenues. To the extent that sports consumers are fanatics, and have
inelastic demands, unless the teams can perfectly price discriminate this forgone consumers'
surplus could be quite large.
Second, the use of forgone revenue to measure economic loss ignores the possibility that
the striking players and/or their families may value their newly created leisure time above zero.
This value is the area under the (short-run) marginal cost curve. It should be subtracted from
total revenue to obtain an accurate estimate of the net economic loss caused by the strike. The
12 Be sure to distinguish for students the two different meanings of the word "surplus" in
economics. We label an excess of quantity supplied over quantity demanded as "surplus" and
also call the area between the demand curve and opportunity cost "surplus." The latter is the
more pervasive use by economists, but students are likely to think the former is the only
important use.
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value of leisure time created by the strike might have been quite high because it is rare for
players to have much time with their families during the summer.13
What is really needed to estimate the economic cost of the strike is a measure including
all benefits, both those accruing to the consumers as surplus and those captured by the teams, and
excluding the alternative value of the released resources (of which the players are the largest
component, but could include the value of alternative uses of the stadium, for example, as voting
locations during the 2020 election). Taking these considerations into account, Chris Douglas
(1996) estimated the contemporaneous economic cost of the 1994-95 baseball strike at $813
million dollars, about $10 million per day, while forgone revenues were only $8 million per day.
Forgone spending on hotels, food, souvenirs and parking contributed almost nothing to the social
welfare loss of the strike because for the most part those services are provided in competitive
markets with quite elastic supply and demand. Fans simply drank their beer elsewhere in late
summer of 1994. Little surplus was lost by their relocation. However, the inelastic demand for
baseball created a substantial loss in consumer surplus. Zipp (1996) provides a good empirical
account of these issues.
Strategy
Game theory now appears as a separate chapter in many introductory economics texts
and is being infused throughout other courses in the economics curriculum. Basic concepts of
game theory - think ahead, put yourself in your rival's shoes, backward induction, indirect
effects, dominant and dominated strategies - are enormously useful in everyday life.
Most sporting events are zero-sum games. As Coco Gauff gains a point, Serena Williams loses
one. As the Green Bay Packers gain four yards, the Dallas Cowboys lose four yards. The
concepts of game theory are usually introduced with zero-sum games. Their symmetry simplifies
the analysis of pure strategy games, allowing more attention to the fundamental ideas. Also, the
concept of preventing your rival from being able to take advantage of your own strategy by
making her indifferent among her alternative strategies is an intuitively appealing basis for
teaching mixed strategies that evaporates for variable-sum games.
Although the existence of multiple equilibria is probably the most disconcerting
characteristic of games for veteran economists, the absence of counterintuitive results often
creates a mental obstacle for the rookie student. Because of their experience with sports, many
students believe they "know how to play the game." Producing counterintuitive results in this
context is persuasive evidence that there is something useful to learn from serious study of
economics. A simple exercise with a mixed strategy equilibrium game demonstrates the
importance of taking indirect effects into account, which is a key element of "thinking like an
economist."
The payoff matrix in Figure 8.1 reports the success of a baseball batter against a pitcher.
For simplicity, the pitcher has only two pitches, a fastball and a curve, and the batter knows that
13 Players on strike are not unemployed. In U.S. labor statistics they are counted both as in the
labor force and employed. However, if the players are locked out by the owners, then they are
considered unemployed.
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is the pitcher's complete repertoire. The batter is relatively more successful against fastballs.
When he guesses the pitcher will throw a fastball and the pitcher does throw a fastball, he bats
.600. When he guesses correctly that the pitcher will throw a curve, however, he hits only .400.
When he guesses incorrectly what will be thrown, he always bats just .200. The goal of the
pitcher is to minimize the batter's average and the goal of the batter is to maximize it.
Figure 8.1: Baseball Game Payoff Matrix (hitter's batting average reported in cells)
The pitcher knows that if he is predictable, the batter has a substantial edge. If the pitcher
were to throw only one type of pitch, it would be a curve, but the batter still would be successful
forty percent of the time. There is no dominant strategy for either the pitcher or batter because
the best pure strategy of each depends on the pure strategy undertaken by the other. There is no
pure strategy Nash equilibrium in this game.
There is a mixed strategy Nash equilibrium, however. If the pitcher throws fastballs p
percent of the time so as to ensure that the batter cannot take advantage of the pitcher's mix
between fastballs and curves, then the batter must be indifferent between guessing fastball,
guessing curve, guessing 50 percent fastballs and 50 percent curves, or guessing any other
combination available to him. Thus the batter's expected payoff when guessing any combination
of fastballs and curves must be the same. If it is not, he will select the strategy that gives him the
higher expected batting average and thus take advantage of the pitcher. The calculations are
easiest with the batter's pure strategy alternatives. The expected payoff to him from guessing
fastball is {. 600p + . 200( 1 - p)}; his expected payoff from guessing curve is {.200p + .400(1 -
p)}. The value of p, the percentage of fastballs thrown, that equalizes the two expected payoffs is
1/3.14 The expected batting average of the batter is .333. Students need to be reminded that while
the pitcher's optimal strategy is to throw 1/3 fastballs and 2/3 curves, the actual delivery of the
pitches must be unpredictable.
Now comes the fun. Suggest to the students that you have a tip for the batter: "choke up"
on the bat. The effect of this is to raise the batter's success when he is expecting a curve but the
pitcher delivers a fastball. Fewer of these pitches now "blow by" the batter. The batting average
in the upper right cell of Figure 8.1 rises to .300. Ask students what the pitcher should do now
that the batter is better at hitting fastballs (when he was expecting a curve). The majority will
respond that the pitcher should throw more curves. Then solve for the mixed strategy
equilibrium.
14 Set the two expressions equal to each other and solve for p.
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The new equilibrium mix for the pitcher is 40 percent fastballs, an increase from 33.3
percent prior to the batter "choking up" on the bat, and opposite the usual student prediction. The
new expected batting average is .360, a rise of .027, as would be expected when the only change
was a batting improvement. Throwing more fastballs after the batter improved his hitting against
fastballs will puzzle some students because they will fail to take into account how the batter will
change his optimal strategy with his newly discovered skill. The batter's original optimal
guessing mix was one-third fastballs. After the tip to "choke up" on the bat, his optimal mix is to
guess fastball only one-fifth of the time. He guesses curve more frequently after the tip because
the tip has helped his batting when he guesses curve. So he guesses curve more frequently, 80
percent rather than 67 percent of the time. The pitcher, in turn, adjusts his optimal mix by
favoring fastballs because now the batter is guessing curve more frequently, and the pitcher
always does worse when actually pitching what the batter is expecting. So the pitcher throws 40
percent fastballs rather than 33.3 percent fastballs. This exercise helps students appreciate the
importance of thinking about how their rival might react to a change in circumstances as well as
how they should adjust their own behavior. 15
Moving from the theoretical world of game theory and analytics to actual experiences on
the field, court or ice, can engage students. For example, in soccer where should a team position
its goalie on a penalty kick, and do they employ a mixed strategy? Should a team “sit on a lead”
and choose ball control over the risks associated with trying to score again? In basketball when
does it make sense to foul an opponent on purpose near the end of a game? After scoring a
touchdown, should a football team attempt a two-point conversion with about a 50-50 probability
or settle for the virtual certain 1-point kick?
The structure of sports leagues locks teams into a classic prisoner’s dilemma. Winning is
a zero-sum game. Attendance rises with winning, and so revenues depend on a team's success on
the playing field. Thus, each team faces an incentive to sign high quality free-agent players, even
though, when all teams sign comparable free agents, nothing different happens to collective win-
15 For another application of game theory to baseball see Merz (1996), who discredits Roy
Blount Jr.'s (1993, 68) allegation that the great Giants' centerfielder Willie Mays, who never led
the league in doubles, often retreated to first base when he realized he could get to second (but
not all the way to third) after a hit into the gap. Blount contends that Mays returned to first
because left-handed pull-hitter Willie McCovey followed him in the Giants' batting order for 13
years. With Mays on first base, the first baseman had to move to the bag to hold Mays close,
opening a bigger hole for McCovey on the right side of the infield, while if Mays had gone on to
second rather than retreating to first the opposing team would have walked McCovey
intentionally. If McCovey got a hit, Mays could then easily make it from first to third with the
Giants ending up with men on first and third rather than first and second bases. Merz explains
how this alleged strategy of Mays is dominated by going to second no matter what the opposing
pitcher does when McCovey comes to bat. Furthermore, why is the first baseman holding Mays
on the bag to reduce the probability of a steal of second when Mays just returned from second to
first voluntarily? This is an example of how to infer intentions from observable behavior, the
economist's stock-in-trade.
12
loss records. Indeed, the aggregate "output" of the league in terms of games won cannot increase
as long as the schedule remains fixed. As a result of competition for free agent players, each
team's expenses rise, revenues remain constant, and profits decline. In order to escape this
prisoners' dilemma over the years leagues have devised various schemes such as reserve clauses
and reverse-order player drafts, the latest of which are aggregate player payroll ceilings
(inappropriately called "salary caps").
Levi Leipheimer, one of cyclist Lance Armstrong’s teammates, admitted to doping and
using performance-enhancing products because he felt everyone else in cycling was doing it, so
he figured it was either go along or be satisfied with not being a contender. He was trapped in a
prisoner’s dilemma. After the pervasive cycling scandals became public knowledge, racing
officials tried various techniques to alter the game payoffs so as to eliminate performance
enhancing drugs as a dominant strategy (Eber, 2008; Cartwright, 2019).
In the 2015 Super Bowl between the Seattle Seahawks and the New England Patriots, it
all came down to the last 26 seconds. Seattle, down 28-24, had the ball on the Pats’ one-yard
line, and they had their powerful running back Marshawn Lynch ready to dive into the end
zone. Six points, the extra point, and they own the Lombardi trophy. But Seahawks’ coach Pete
Carroll – think mixed strategy here – chose to pass instead, figuring Pats’ coach Bill Belichick
would stack the line in anticipation of Lynch’s plunge. But maybe Belichick was thinking that
Carroll would think this way. The Patriots intercepted the supposedly unexpected pass and the
rest is legend.
Monopoly
There are numerous examples of monopoly power in sports. Most professional sports
teams have market power over local ticket sales because their geographic distance from other
teams in the same league creates substantial costs to a consumer who would try to substitute live
performances of another team in the face of a price increase.16 Teams don't have to worry about
other suppliers moving into their territory because all of the professional sports leagues have
restrictions on team movements, especially those that would place a relocating team near another
franchise. In addition, the entry of new teams is strictly limited by the existing teams, who have
authority to grant or refuse entry into their league. In a business where new entrants must rely on
the cooperation of existing firms to produce their product (who will they play if the incumbents
refuse?) there is not likely to be entry from hostile new competitors.17
16 In the few instances where there are two professional franchises in the same sport in the same
city, it turns out that ticket prices exceed the league average, a surprising result when
competition is added. This result occurs because even just one half of the population in these
few cities (Los Angeles, San Francisco, New York, Chicago) vastly exceeds the average
population of the cities in which franchises are monopolists.
17 The prospects for entry in professional team sports also differ substantially from other
franchise industries because of the monopoly nature of the four major team sports in North
America. If, for example, McDonald's, Pizza Hut, Chevron, or Verizon determines not to place a
franchise in St. Louis, Burger King, Papa John's, Exxon, or AT&T may enter the St. Louis
13
Although expenditures on sports obviously come at the expense of expenditures by
consumers on other goods and services, and most likely at the expense of other entertainment
options, evidence also suggests that consumers do not even view different sports as particularly
good substitutes.18 Studies of the demand for tickets to professional team sporting events find
elasticities of demand at the average price generally less than -1.0 (Fort, 2006) which at first
glance suggests that team owners set prices too low to maximize profits. Students can be shown
how a profit-maximizing team with very low marginal costs would maximize profits by setting
ticket price so that the elasticity of demand is close to (minus) one. If marginal costs are higher
the profit maximizing price is in the elastic region of demand. Marginal costs are certainly
minuscule for additional patrons to an individual sporting event that is not sold at, and also quite
low for additional games during a season. But if a team owner is more interested in maximizing
attendance, or if a team earns profits from the sale of parking and concessions that increase if
attendance is larger, then the profit maximizing price easily could be in the inelastic region of
demand (Fort, 2006).19 Newspapers and magazines similarly price in the inelastic region of
demand in order to boost circulation and therefore advertising rates.
Perhaps the most interesting application of monopoly to sports involves league decisions
to expand. Absent the contrived scarcity of teams that evolves from limitations on expansion, the
price of franchises would be modest. Who would be willing to pay almost a billion dollars for an
existing franchise when one could get a new one for free? Whereas existing franchises might
have some goodwill value, new franchises do not. Yet recent prices for expansion franchises in
football, baseball, and ice hockey have been close to prices at which the ownership of average
incumbent teams (not the most valuable franchises, which are now in the billions of dollars20)
has been transferred, suggesting that the lion's share of the franchise price represents the scarcity
value of a franchise rather than established goodwill.
How, then, would leagues determine the optimal rate of expansion to maximize the net
present value of the entry fees they collect from expansion franchises? The entry fees are
distributed among the incumbent members of the league. No expansion generates no fees. Rapid
expansion reduces the willingness of prospective owners to offer high fees for an expansion
market. But if the NFL decides not to locate a franchise in St. Louis, there is no comparable
professional football league whose entry into the St. Louis market can satisfy that demand. 18 See, for example, Noll (1974) for a series of studies of different sports in which
the presence of another sport in the same community does not appear to affect attendance. More
recent studies on basketball and MLB in the 1990s find a negative effect of the presence of
another sport on attendance, but similar research on Australian Rules Football, Rugby League,
and Rugby Union in Australia finds, like Noll, no effect (Borland and MacDonald, 2003, 490). 19 If the price of attendance is more than just the ticket price that is used in calculating the
elasticity of demand, which it is if travel to the game is required, then the true elasticity of
demand exceeds that estimated using the ticket price alone.
20 In October 2020, billionaire Steve Cohen paid $2.4 billion to purchase the New York Mets
baseball team.
14
franchise, because the availability of more expansion franchises are then anticipated over the
horizon. Between these extremes is an expansion rate that maximizes the net present value of
league entry fees. Leagues must expand slowly enough to keep some franchise hungry cities and
potential owners chomping at the bit, in effect creating the artificial scarcity symptomatic of all
monopolies. This scarcity scares bidders into inflating their offers for fear of otherwise being
rationed out of the market. But leagues also must expand fast enough to ensure that the number
of vacant cities that could support a team does not approach a number that could support an
entire new league (perhaps eight). Although an incumbent league can prevent the hostile entry of
individual teams by refusing to play them, it cannot similarly block the entry of an entire
independent league. Indeed, in 1960 the American Football League (AFL) initiated operations
that were so successful that it eventually successfully challenged the incumbent NFL. Of course,
once both leagues recognized the effects of competition on owners' profits (via salary
competition for new and free agent players), they merged, with the legal blessing of Congress.
Franchise owners often plead their case for monopoly power to Congress. Both the NFL
and the NBA secured legislation that allowed them to merge with competing leagues in the
1960s and 1970s without incurring antitrust liability. The NFL also persuaded Congress to pass
the Sports Broadcasting Act of 1961, permitting teams in professional sports leagues to sell their
broadcast rights collectively. (Universities are not covered by the Sports Broadcasting Act. Thus,
in 1984, they were ruled to be in violation of the Sherman Antitrust Act for engaging in similar
behavior.)
Congressional pleadings invariably include owners' claims of poverty. Most professional
sports teams are privately owned, and not required to disclose financial information publicly. For
the most part the teams have asked the public to take it on faith that owning a professional sports
team is not profitable. Economists find these claims disingenuous in light of the rapid rate of
increase of franchise values, averaging from 11 to 18 percent annually over the 1990s (Fort,
2011, p. 7) and from 11 to 16 percent annually from 2008 to 2016 (DeSantis, 2018) for the four
major team sports (Scully 1995, 132). Why, we might ask, would smart business people, who
have earned fortunes in other industries, pay ever increasing prices for an asset that is expected
to generate only losses for their poor owners into the foreseeable future? This conundrum
provides an opportunity to discuss with students the source of asset values and the possibility of
nonpecuniary returns, as well as the honesty of professional sports franchise owners.
Monopsony
For many years professional sports franchises were able to buy (players' services) low
and sell (tickets and broadcast rights) high. They enjoyed monopsony power in the purchase of
their primary input - players - through an agreement among the teams in a league not to hire a
player from another team unless the owner of that team voluntarily relinquished rights to him
(usually by selling or trading him to the team that most desires the player’s services). They sold
their tickets in markets insulated from competition with other teams in the same sport by
agreement with the other teams in their league and sold national broadcast rights collectively as
monopolists, a practice sanctioned by Congress in 1961.
.
15
The linchpin of their financial success was their monopsony power over players.
Beginning with the emergence of players' unions in the 1960s and exacerbated by strikes, union
contract settlements, and periodic legal skirmishes, the monopsony power of professional sports
teams over veteran players has been drastically curtailed. Each of the leagues still drafts new
players, who may play only for the team that selects them (or the team to which the draft rights
are sold or traded). This continues to depress the earnings of relatively new players below
competitive market rates. It is perpetuated through the complicity of veteran players who agree
to incorporate the draft rules limiting salaries of young players into their union contract with the
leagues, thus exempting the draft from the antitrust laws. Veteran players gain by the
exploitation of rookies to the extent that funds that would otherwise go toward meeting
competitive market salaries for new players are available for negotiations between teams and
their veterans (White 1986).
Rookie professional players are also disadvantaged by rules adopted by the NFL and
NBA that do not allow teams to draft players until people in their high school graduating class
have completed either three years (NFL) or one year (NBA) of college, respectively. These rules
allow the professional leagues to keep the players on lower salary “rookie contracts” later
through their careers, when they often are approaching the peak of their playing skills. It also
helps college and university teams to maintain high quality of play while paying no salaries to
players, and to attract sufficient revenues to pay coaches well and build superb playing facilities.
The dissipation of market power over veteran players has produced a natural experiment
to test the predictions of the monopsony model. Statistical studies of salaries show convincingly
that when draft and player-retention schemes were relaxed in the 1970s, large increases in player
compensation resulted (Raimondo 1983; Scully 1989; Quirk and Fort 1992; Kahn 1993). In the
2020s apprentice baseball players salaries remain under the control of the teams through an
agreement with veteran players to include such restrictions in the collective bargaining
agreement. As a result players in their first three years in the league make about thirty percent of
their estimated free market value (Krautmann 2019). Compensation has grown most rapidly
when either courts or collective bargaining weakened the draft and retention schemes, and has
grown faster as players have won more relief from these constraints. Over the past two decades
professional basketball players' salaries have risen fastest, baseball players' second fastest,
football players' third fastest and ice hockey players slowest. The rapid increase in football
player salaries in the 1990s, following the introduction of true free agency for veteran NFL
players in 1993, further corroborates the connection between salary levels and competition in the
labor market for players.
As monopsony power over their labor inputs has eroded, professional sports teams have
turned increased attention to their second most costly input - a facility in which to stage their
games. Each of the four major professional team sports leagues operates under a provision
similar to the NFL's Rule 4.3, which requires approval of a supermajority (75 percent in the
NFL) of the owners for franchise relocation. This voting requirement provides a strategic
advantage to both incumbent teams negotiating a stadium contract extension with their existing
landlord (often the city or county in which they are located), and teams negotiating with a
stadium owner in a location to which they propose to relocate. An incumbent tenant can threaten
to relocate and also to form a coalition to block any other franchise from replacing it, thus
16
creating monopsony power for the team in renegotiating its facility lease. A relocating team can
credibly threaten to block the relocation of any other team that competes with it for a stadium
lease because it needs to form only a sub-majority coalition (of at least 25 percent of teams) to do
so, thus deterring competitive bidding for the facility with which it is negotiating.
The result of franchise relocation restrictions in professional sports leagues is a balance
of bargaining power tilted toward tenants - that is, team owners. The exploitation of this
monopsony power in the stadium and arena market in recent decades is illustrated by the shift in
stadium and arena financing. In the 1950s a majority of professional sports facilities was
privately owned and financed. Today almost all stadiums and arenas are constructed with public
funds and leased to teams at trivial rents because the landlords expect to receive external (to the
team) rents in the form of marketing and enhanced prestige for their city. As the leagues'
monopsony power over players has declined, professional sports teams have taken advantage of
the country's obsession with sports by demanding free or at least heavily subsidized facilities
from communities that believe a professional sports franchise is needed to acquire the image of a
"major league" city, and see building a stadium as the best way to get one (Noll and Zimbalist
1997; Coates 2019).
Collusion and Cartels
Both professional and intercollegiate sports are replete with collusive agreements that
illustrate the fundamental principles of cartels. Here we focus on activities of the National
Collegiate Athletic Association (NCAA) (Tollison, 2012). Featuring the NCAA to teach about
cartels has two advantages. First, many students are enrolled at institutions that are members of
the NCAA, and take delight in evaluating and criticizing their college or university. Second, the
NCAA is not exempt from the antitrust laws prohibiting collusive conduct as are Major League
Baseball, national television broadcasting contracts of all professional sports leagues, and the
league mergers in basketball and football.
The case for collective behavior in the organization of sporting contests among colleges
and universities originated with two private market failures - a public good problem and an
externality. The first was the necessity to develop standard rules for football, and the second was
the need to control player violence that helped individual teams win games, but was destroying
public interest in college football in the late 19th century. Individual colleges were caught in a
prisoner’s dilemma. They all agreed that college football would be better off with less violence,
but any team that unilaterally cleaned up its act would suffer on the scoreboard and financially.
Collective action was required.
The NCAA was founded in 1905.21 Once it succeeded in controlling violence, the
organization expanded into economic regulation. Its most important market restrictions were
21 Portions of this section are from Siegfried (1994) and are used with permission of the
copyright holder, Federal Legal Publications, Inc. For an extensive analysis of the NCAA as a
cartel see Fleisher et al. (1992), Sanderson and Siegfried (2018) and Sanderson and Siegfried
(2019).
17
developed after World War II, when members agreed to limit player compensation to tuition,
room and board (initially called a "Sanity Code," as if paying players were insane) and to
centralize the sales of rights to televise live college football games.
In the 1950s the NCAA developed a system to detect and punish cheating on the
agreements, and extended its control of output by limiting the annual number of games in
football and men's basketball. Punishment for cheating (e.g., broadcasting a game in competition
with the collectively negotiated exclusive NCAA broadcast, or compensating a player beyond
the agreed upon limit of tuition, room and board) could be severe, because the NCAA controlled
all college sports and a violation in one sport could spawn sanctions in all.
NCAA sports are ripe for a cartel. There appears to be a quite inelastic demand, and entry
is difficult.22 These characteristics ensure substantial rewards to a successful cartel. It is
relatively easy to police the behavior affecting some parts of the cartel agreement (e.g.,
agreement not to televise live football games in competition with the game sold collectively),
and institutional arrangements have been devised to limit cheating on other aspects of the cartel
agreement (e.g., investigations of and sanctions for exceeding the agreed limit on payments to
players).
The restriction of output by limiting the number of games played and televised and
limitations on the price of the most important input - the players - enhance net revenues
sufficiently that institutions face strong incentives to field successful sports programs. The
natural outcome has been a costly expansion of competition in unregulated areas, for example,
recruiting, which erodes the net revenues derived from the programs. The NCAA reacted by
imposing limitations on some forms of non-price competition, such as limiting the number of
coaches, the number of scholarship players, and player recruitment activities. In addition to
direct efforts to control costs, the NCAA also enjoys external support for its efforts to protect the
revenues produced by cartel restrictions from being squandered via rent-seeking competition
(e.g., amateurism is "good" [for players, but apparently not for coaches] on moral grounds). But
not all outlets for competitive pressure have been capped. Universities still compete for players
by building bigger and better (than the competition) facilities to impress potential recruits.
In contrast to professional sports teams, which historically monopsonized player markets
by means of an agreement not to hire players who were allocated to other teams, there is no
"draft" of players into college sports. The NCAA controls the player market not by creating
market power for individual teams through a draft that limits player mobility, but rather by
establishing a maximum wage below the competitive equilibrium wage for the entire market.
This provides a pedagogical opportunity to analyze price controls without resorting to the usual
22 Entry may be difficult into NCAA sports, but it is easier than entry into professional sports
leagues. College teams that wish to upgrade to Division I status (the highest level of competition,
and the only level that generates substantial revenues) have numerous teams they can approach
as prospective opponents. In contrast to professional sports, collegiate teams attempting to join a
major conference also have alternatives, as there are more than a half dozen major college
athletic conferences.
18
examples of New York City rent controls, or usury laws. The gap between a player's marginal
revenue product and the cost of tuition, room and board illustrates the incentive facing coaches,
athletic directors and boosters to offer clandestine payments to college athletes and to
overindulge in complementary factors of production such as coaches, stadiums, or training
facilities as a means of competing for the best athletes.
The NCAA should be recognized as a cartel of colleges and universities, whose behavior
is more closely parallel to OPEC (Organization of Petroleum Exporting Countries) than Mr.
Chips (Sanderson and Siegfried, 2019). The fact that the members are not-for-profit institutions
does not dampen their incentive to maximize revenues, for those revenues can be put to uses that
enrich the individuals in control. The frequent claims that athletic departments are in poverty are
difficult to accept when so few major programs are terminated and so many coaches and athletic
directors appear to be paid many times their value in their next best use.23 Apparently many of
the benefits do not show up on athletic department financial statements, providing an opportunity
to discuss rent seeking and external benefits with your students (and why head football coaches
often are paid many multiples of what professors of economics are paid).
The Role of Government
Sports examples can be used to explain the role of government in a market economy. For
example, under public interest rationales for government we consider market imperfections -
using antitrust laws to create or maintain competition; dealing with natural monopolies;
improving efficiency when there are capital market imperfections; internalizing externalities;
providing public goods; correcting for information asymmetries; and equity issues. The empirical
record of government involvement in sports has been far from favorable to competition -
baseball's antitrust exemption, the Sports Broadcasting Act (permitting the collective sale of
television rights to broadcast games), condoning the NCAA cartel, sanctioning mergers between
competitive leagues, constraining labor mobility, and so forth; instructors can invite students to
come up with examples - positive or negative - that fall under one or more of the usual public
interest rationales for government intervention. Also, one need not search far to find illustrations
of the use of government to promote private interests in sports.
The recent controversies surrounding public financing of stadiums and arenas provide an
excellent context for discussing the role of government. Why do cities offer teams "free" or
highly subsidized places to play more frequently than similar assistance to fellowship clubs,
bowling alleys, bookstores, or movie theaters? Do the grounds for public participation fall under
public interest or private interest criteria? What are the redistributional consequences, given the
average wealth levels of owners, players and fans vs. taxpayers in general (or, depending on how
the stadium is financed, the incidence of sales taxes or property taxes or of lottery revenues)? Is
a stadium or arena a public good? Would free riding occur? Does a major league sports team
create positive (e.g., favorable image, entertainment options) or negative (e.g., congestion, bad
23 In October 2020 national champion Louisiana State University head football coach Ed
Orgeron voluntarily took a $300,000 per year (five percent) reduction in his salary to match the
five percent pay cut imposed on all non-coaching employees of the LSU athletic department. A
$300,000 pay cut would reduce most people to zero; it left Orgeron with $5.7 million.
19
role models) externalities? Are sports leagues natural monopolies? Finally, is league control of
entry, relocation, labor relations, etc., a good substitute for direct government control if there is,
indeed, a public interest reason to forego reliance on competitive markets (Siegfried and
Zimbalist, 2000)?
II. ADDITIONAL ILLUSTRATIONS
Space prevents us from including detailed descriptions of the many various applications
of economic principles to sports. In this section we briefly identify a limited grab bag of
possibilities.
Sports is a fertile field for examples of comparative advantage. Babe Ruth was a superb
pitcher for the Boston Red Sox before he was converted to a right fielder in order to keep his bat
in the daily lineup. (In his last three years as a pitcher for the Red Sox he was a combined 64-3,
leading the Red Sox to three World Series victories). Although he had an absolute advantage in
pitching over many other players, his comparative advantage was in hitting (Scahill 1990). So
after he was sold to the Yankees for $125,000 in 1920, he remained a right fielder.
After some thought, most students accept the notion that free exchange can benefit both
traders, though when it comes to U.S. trade with China almost everyone seems to believe that
only China benefits. Politicians are easily duped into believing that most other countries (China,
Mexico, Canada, Japan) benefit from trade at the expense of the United States. The sports
counterpart is that some commentators and fans believe that if two teams engage in a player
trade, only one benefits. They find it hard to believe that at least ex ante both teams expected to
gain from the transaction. Every city and every sport have lists of famous "bad trades," where the
home team's general manager exposed his incompetence. Thus, we got a summer 2016
newspaper headline: “Atlanta Hawks get Dwight Howard in move that will benefit both
parties”—as if this were something that only happens on rare occasions (Golliver, 2016). It was
surely not written by someone schooled in economics.
Trade opens up related applications of exchange, including Pareto optimality (when
we've exhausted all opportunities for mutually beneficial gains), the fact that trade value depends
upon the marginal values and opportunity costs (such as what do I have already, in terms of point
guards or outfielders, and what do I have to give up?), and diminishing marginal returns or gains.
The advantage of agents as negotiators whose broader reputation is at stake and who can insulate
the player they represent from creating animosity with a general manager is also relevant. In
spite of loathing they receive from owners and the media, agents' comparative advantage
presumably is to perform functions that lower transaction costs. The agent market is
characterized by relatively free entry and price-taking behavior, not unlike real estate agents.
.
Instructors can employ a simple sports example to illustrate many concepts associated
with production (Scully, 1974; Jamil, 2019). A discussion might ensue about what constitutes
the objective function or output for a team owner - is it victories, the margin of victory (i.e., point
spread), championships, attendance, revenues, or television shots of the owner basking in glory
in his or her private booth with celebrity friends? Traditional inputs in the production process are
20
players, owners, and managers/coaches, but there are others such as training, grounds keepers,
computers and technology, the stadium, promotions and gustatory amenities. As a team employs
higher quality inputs - that is, acquires better players - its expected number of wins and
attendance rise, but after some point the rate of increase begins to diminish, and it is conceivable
that total attendance and/or revenues could even decrease if a team were so dominant that its
contests became predictable and boring.
It is difficult to come up with examples of a backward- bending labor supply curve for
individuals. Annika Sorenstam provides an option. In 2002, at age 32, Sorenstam won twelve
tournaments on the LPGA tour (in that single year), total dominance for a golfer. That year she
announced that she planned to cut back on her 2003 schedule and retire well before she was 40,
thereby reducing her supply of labor. The implication was that she planned to start a family and
had plenty of money to live on for the rest of her life (her net worth of approximately $40 million
in 2020 will allow Annika, her husband and their two children to live comfortably for the rest of
their lives).
Sports offer convincing examples of the principle of specialization and division of labor,
and it has become more evident over time. The "olden days" often saw more multi-sport players,
both in college and in the professional ranks, than exist today. To excel at the highest level of
performance, athletes (and musicians and other performing artists) simply must start earlier and
practice longer. Time split between two major activities entails a large opportunity cost for each.
Even within a sport, say football, one used to see one athlete play more than one position – in the
1950s both on offense and defense, for example, or as a position player and a punter or field goal
kicker. Football rosters now contain many more specialty players - pooch punters, nickel backs,
long snappers, etc. Baseball relies more and more on specific role positions - a designated hitter
(in the American League), long and short relievers, closers, and even base-stealing specialists.
Young girls must now choose between gymnastics and figure skating even if they exhibit
considerable talent in both sports. Roger Banister, who broke the four-minute mile barrier in
1954 while he was a full-time medical student, and other earlier track stars were really amateurs.
They trained part-time, whereas now track is a full-time occupation for world class runners.
The economics of ticket resale ("scalping") provides another refreshing alternative to
New York rent ceilings as an example of the effects of a price ceiling. In locations where
scalping is illegal, the price ceiling is zero, preventing tickets from getting to those who value
them the most. Arizona added an interesting twist to scalping a few decades ago, legalizing it
within a specially marked area outside the event arena or stadium at a specified time. With all the
scalpers together in one place along with all the buyers, the area looked like the floor of the
Chicago Board of Trade (before everything went electronic), and the market power of scalpers
who preyed on buyers ignorant of lower prices on the other side of the venue was dissipated
(Happel and Jennings 1995).
The market for used baseball players illustrates problems caused by asymmetric
information, adverse selection, and the "winner's curse." Pitchers who are signed as free agents
spend more time on the disabled list than those who re-sign with their original team (Lehn,
1982). This can be explained by asymmetric information (Lehn, 1984). Healthy pitchers are re-
signed by the incumbent teams, leaving only "lemons" for the "used pitcher" market because of
21
asymmetric information. Further exacerbating the problem of disappointing free-agent signings
is the winner's curse, caused by a player signing with the team bidding for his services that
makes the most overly optimistic estimate of his future productivity (Cassing and Douglas,
1980). Teams try to protect themselves against these possibilities by scouting, requiring physical
examinations and adding performance incentives to player contracts, but it doesn’t always work.
The winner’s curse also effects bidding among cities for hosting the Olympic Games or FIFA
World Cup, causing most of them to end up in the red after the event (Andreff, 2014).
For most young students a wise investment decision is to remain in school through
college or even completion of a graduate or professional degree. The forgone income for a four-
to eight-year period is rewarded by higher earnings (almost double for a four-year college degree
vs. a high school diploma) over a forty- or fifty-year horizon. Many textbooks discuss and
display these earnings streams and suggest how one would calculate an internal rate of return.
For someone contemplating a career as a professional athlete, the age-earnings profile
looks much different - earnings could start before high school (for a figure skater or tennis star)
or as late as one's mid 20s (for a baseball player), and may virtually truncate around age 30 (as
the average length of a professional career in the four premier team sports leagues in the United
States is four to six years). A good question for students to ponder is the rate of return at which it
makes sense for a young person with reasonably attractive educational and nonathletic career
options to devote herself or himself to athletic training. Given such a short earnings period, one
can understand why a talented athlete would choose to forgo some or all of college, especially if
there is an opportunity to return later. If Tiger Woods had remained at Stanford after his
sophomore year until his class graduated, the Stanford golf team would have been much better,
but Tiger would have missed out on the winner’s trophy for seven PGA tournaments (including
the 1997 Masters Tournament) and almost $4 million in tournament earnings.
An example of opportunity cost is the case of Jeff Fosnes, the star forward on
Vanderbilt's 1974 Southeastern Conference champion basketball team. Fosnes was drafted in an
early round of the NBA draft. He opted for medical school, however, comparing the expected
earnings of a 50-year-old physician with those of a 50-year-old NBA player. For him the
opportunity cost of a professional basketball career was too high because at the time medical
schools did not admit "older" students. If Fosnes had "gone pro," he would not be a physician
today.24
The quality of play and the athletic quality of players in professional sports today is better
than ever, and economics has a lot to do with it. Why? Because more opportunities for fame and
fortune have lured a higher percentage of a growing (domestic, and international, and, since
Jackie Robinson, racially integrated) population into sports. Today's athletes are bigger, stronger,
faster; they are in better physical condition; they start training earlier in life and put in more
hours of practice. Thanks to free agency, they also get to keep a higher percentage of the
revenues they generate. Salary levels attainable by these top performers produce strong
incentives for them to stay in shape and to play better. When one could lose his job as a major
24 The first Heisman Trophy winner, Jay Berwanger of the University of Chicago, faced similar
salary offers from the NFL and business when he graduated in 1936. He selected business.
22
league shortstop 60 years ago and return to his local community at a wage roughly comparable to
what he earned stopping ground balls, the financial inducements to stay in shape were not
overwhelming; today, however, when even a mediocre professional player's sports income easily
exceeds $1 million a year, the sacrifice from returning to an ordinary job is enormous.
In a market economy, economic profits arise from several factors - hard work, chance,
ownership of a specialized resource, entrepreneurship and business acumen, imperfect
information, collusion with rivals, barriers to entry, or government protection. Many of these
sources reflect a short-run imbalance that eventually is competed away, but some endure.
Students can speculate about which factors apply to professional sports. For professional sports
leagues and team owners, continued public protection from rivals, allowed collective action in
selling broadcast rights and limiting expansion and team relocation, financial entry barriers25 and
infusions of taxpayer dollars for new facilities may produce an expectation of continued
profitability despite owners' protests that they are losing money. Finally, the direct financial rate
of return from owning a sports franchise might be lower than for alternative investments because
of the nonpecuniary benefits of ownership - it's fun and it bestows instant celebrity status on the
owner (presumably a positive attribute).
Sports also can be used to illustrate the principle of discounting or present value. An
obvious application is to players' multi-year contracts. The media invariably report’s the
undiscounted sum of the annual salaries over the life of the contract. So a four-year contract that
pays a good third line NHL defenseman $2 million, $2.5 million, $3.0 million, and $3.5 million
annually for 2020, 2021, 2022, and 2023 is reported as an $11 million contract, when its initial
net present value at an eight percent annual investment opportunity cost is only $9.7 million (if
the salaries are paid at the beginning of each respective year, and before taxes and his agent’s
cut).
Moral hazard can be illustrated by the difference in hit batsmen in the American and
National Baseball Leagues. Since the American League uses a “designated hitter” for the
pitcher, who never appears at the plate, a pitcher in the American League has less risk of direct
retaliation if he were to hit a batter on the opposing team. Early empirical evidence supported
this supposition (Goff, Shughart, and Tollison 1997). However, subsequent research argued that
retaliation is more efficiently directed at sluggers than at weak-hitting pitchers, and showed that
American League designated hitters are plunked more frequently than are National League
pitchers. Revised estimates showed that the designated hitter effect on hit batsmen is not
statistically significant. (Trandel, White, and Klein 1998). And one wonders what the wearing of
a modern helmet, and foot, shin, and elbow pads by batters has on a pitcher’s propensity to throw
closer to a batter and/or the batter’s inclination to crowd the plate to avoid being struck out with
a fastball on the outside of the plate?
Adverse selection can be illustrated by a Chicago Tribune June 18, 2002, report that “The
White Sox don’t fare well before big crowds.” The White Sox were only 7-16 when attendance
exceeded 27,000. But larger crowds likely meant the White Sox were playing a better opponent,
25 Because individual teams can't enter the industry, to be a credible threat requires sufficient
capital to form an entire new league with a minimum of probably eight teams.
23
and so they would be expected to perform worse. Although the Tribune article doesn’t say, the
White Sox poor record could also be because the larger crowds were at away games, since the
White Sox were a notoriously poor team and drew few fans to home games that year.
Economists also have a role to play in distributional issues. We can unmask the winners
and losers from particular policies, especially when many of the effects are indirect and the
distributional impacts are obscured. For example, in a study of the income levels of consumers of
different products based on the 1994 Consumer Expenditure Survey (CES), Timothy Peterson
(1997) discovered that the weighted mean income of consumers of tickets to sporting events was
78 percent above the average consumer's income. Such information can help people assess the
distributional consequences of proposals to subsidize sporting facilities from tax revenues
collected via regressive state and local sales taxes. Although it is not clear who benefits most
from such subsidies - team owners, players, or fans - none of them is eligible for food stamps.
A further distribution issue that can foster a good (and often heated) discussion is
differences in compensation between men and women. Should men’s and women’s national
soccer teams be compensated similarly because they play with the same rules and expend
comparable energy? Or should men be paid more because they attract larger crowds that are
willing to pay more for admission to the games? Should prize money be the same on the PGA
and LPGA golf tours? Currently it is not.
Finally, we offer a few examples from the most recent sub-field emerging within
economics—behavioral economics. David Romer’s (2006) analysis of the decision of a football
coach to go for a first down rather than punting on fourth down has attracted a lot of attention.
Based on the probability of making the first down, and the chance of subsequently scoring vs.
getting the ball back after punting and holding the opponent’s offense, or kicking a field goal, he
discovered that coaches punt or try field goals (i.e. kick) far too often. Why? Perhaps coaches
value the decrease in chances of winning because of failed gambles that are immediately evident
and increases from successful gambles that pay off further in the future asymmetrically, called
“present bias.” Maybe the instant humiliation if the team does not succeed in making the first
down when it does not kick outweighs the eventual scoring benefits of the times they do make it.
Devin Pope and Maurice Schweitzer (2011) examined putting by professional golfers
who seldom leave putts short, because few putts that are left short go into the hole! They
discovered that professional golfers leave putts short more frequently when attempting a putt for
a birdie than when attempting a similar putt just to save par. Apparently the thought of turning a
possible birdie into a bogey by launching the initial birdie putt far enough beyond the hole that
they would subsequently face a difficult par putt coming back induces them to play it safe and
leave the putt short more often, insuring the par, but sacrificing a chance at a birdie. The
behavior suggests they don’t want to give up an almost guaranteed par when they face a birdie
putt, and are willing to pay for it by sacrificing some of their chance at a birdie. In behavioral
economics it is called “loss aversion.”
24
III. DO'S AND DON'TS
This list of guidelines should help instructors who use sports to illustrate basic principles
of economics.
• Do remember that not all students are sports fans.
• Do remember that students come with different levels of understanding of league and
team names, star players, and knowledge of the histories and strategies of various games.
• Do bear in mind the instructor-student age gap when selecting examples and illustrations;
think Rory McElroy and Serena Williams rather than Jack Nicklaus and Chris Evert.
• Do use current media accounts and data for both illustrations and measurement purposes.
• Do encourage students to be creative in the application of economic theory to the "wide
world of sports."
• Do let students shine when they know more than you do about a particular game or its
rules or history.
• Don't rely exclusively on North American sports examples and U.S. male sports figures;
instead diversify. 26
• Don't get caught up in the facts, personalities, or the rules of particular sports.27
• Don't overdo it on sports jargon.
• Don't forget it's an economics course, not a sports course.
• Don't rely too heavily on sports examples; choose your spots carefully.
26 One of the authors, for example, always employs examples of players from his institution's
women's basketball team when using the effect of a player's points in the most recent game on
her scoring average to explain the relationship between marginal and average values. 27 Some years ago a student attempted to enroll in The Economics of Sports course taught by one
of us. That course requires intermediate microeconomic theory as a prerequisite. The student did
not meet the prerequisite, but insisted he would have no difficulty because he "knew more about
sports than anyone else." When he was denied admission to the course (a review of his record in
principles confirmed that he surely did not "know more than anyone else about economics") he
muttered that there must be something seriously wrong with a course on The Economics of
Sports if a thorough knowledge of sports was not sufficient background to take it. If he had
realized the power of the core of economics principles and understood the way in which
economists apply those few powerful ideas to a myriad of issues, he might have recognized that
a discipline founded on the idea of "have tools, will travel" relies mostly on the tools.
25
• Don't let the sports examples stand on their own; tie them into economic theory.
IV. CONCLUSION
In this chapter we have tried both to convey the usefulness of using sports in teaching
economic theory to undergraduates and to illustrate some of the ways this can be done. Our
coverage is not exhaustive in depth or breadth, but it should give instructors a start. Other
economics topics that can be dealt with through sports examples include: risk and uncertainty;
union behavior; income and substitution effects as they apply to the supply of labor; racial
discrimination; the structure of the competition and expected outcomes, such as more likely
repeat champions in tennis than golf; and externalities.28
One could teach an entire introductory (or intermediate level) price theory course using
nothing but sports examples. Although we do not advocate such specialization, it is nevertheless
our contention that a dose of sports illustrations can contribute toward making an economics
course more enjoyable and productive for both instructors and students.
28 One could also tie in Peltzman's well-known 1975 study of offsetting driver behavior with
regard to seat belt usage with a sport's proposition that better and more protective equipment for
NFL players doesn't reduce injuries - they just run at each other harder and attempt riskier
behavior until their injury rate reaches the prior equilibrium they are willing to tolerate.
26
NOTE
* The authors thank the late T. Aldrich Finegan for comments and Amara Haider and Madelaine
Ryan for research assistance that improved the chapter.
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